The Midterm Election: Prospects For A Republican Senate Majority

The primary election campaign season unofficially concluded Tuesday (Aug. 19) with the outcome of the Alaska Senate primary, which was the last key nomination contest prior to the general election. While there were a few high profile surprises during the primary season, this year's primary elections do not appear to have affected the general election outlook to the same degree that primary outcomes have over the last couple of elections.

The focus is now on the general election on November 4, where Senate Republicans hold 45 seats and need a net gain of six seats to win a majority. Recent polling shows Republican candidates leading by large margins in races for three Democratic-held seats, and by very slim margins in another four contests. While these early polls are not particularly reliable, overall they imply a tight race with a clear opening for Republicans to take a narrow majority of Senate seats.

As the election draws near, the potential effects of a Republican Senate majority seem likely to become more of a focus for market participants. A slim Republican majority seems unlikely to us to meaningfully alter the outlook for major policy reforms, since Democratic support would still be necessary in the Senate and the President would still have the option to veto. That said, the details of more routine legislation could be affected. Uncertainty could also increase regarding high profile deadlines such as the debt limit or the expiration of spending authority; markets have gradually become accustomed to the way Congress has handled these deadlines, but a change in control could lead to some renewed uncertainty regarding these deadlines, at least temporarily.

In the four months since we last wrote about the upcoming midterm election, the outlook has changed only incrementally. Although there were a few surprising retirements and primary election results over the last few months, none of these seem to have significantly affected the overall prospects for control of the House or Senate.

As noted in our previous report, the composition of the House continues to look unlikely to change significantly due to an apparent lack of competitive seats and the absence of national political momentum sufficient to create a "wave" for either party. Regarding the Senate, most observers expect Republicans to gain at least four seats due to the composition of seats up for re-election this year and as a result of several Democratic retirements. While there is no formal consensus expectation, the average midpoint of the ranges projected by several well-known election forecasters rounds up to a six-seat Republican gain, i.e., just enough to win a majority.

Exhibit 1 demonstrates the challenge that Senate Democrats currently face: the recent average polling margin in each Senate seat up for re-election this year is shown on the horizontal axis and the two-party margin in the 2012 presidential election in that state is shown on the vertical axis. Democrats will have five open Senate seats where the incumbent is retiring. Three of these will be in states that voted heavily Republican in the 2012 presidential election --South Dakota, West Virginia, and Montana--and polling over the last several months has consistently favored the Republican candidates in these contests. Four Democratic incumbents are also running in states that voted Republican in the presidential election in 2012: Alaska, Arkansas, Louisiana, and North Carolina. Current polling suggests these races are close to even, with Republicans leading narrowly in three of them as well as in Iowa, which voted slightly Democratic in 2012. A few other Democratic seats beyond these appear fairly competitive, either because they are in states that tend to be closely split at the presidential level, or the incumbent is not running, or both.

Fewer Republican seats appear to be competitive. In part, this is because there are fewer Republican seats up for re-election at all: only 15, compared to 21 Democratic seats. It is also because, with the exception of Maine, which does not appear to be a close contest, there are no Republican seats up for re-election this year in Democratic-leaning states. That said, recent polling implies that contests will be competitive for Republican-held seats in Georgia, where the incumbent is retiring, and Kentucky, which has voted strongly Republican in recent presidential contests but where sparse early polling indicates a very close race.

As the election draws near, we have begun to receive more frequent questions about the implications of a potential Republican Senate majority. In general, we would expect the effect on policy outcomes to be fairly limited, since the government would still be divided, just in a different way than it was before:

1. There should be little effect on most of the major policy debates. Even if Republicans gain a slim majority in the Senate, they would still need Democratic support to reach the 60 votes usually necessary to pass legislation in that chamber. Just as importantly, President Obama could veto any legislation he opposed and Republicans would be far short of the 67 votes needed to overcome a veto. Many of the major policy items on the agenda, such as immigration reform, housing finance reform, or changes to financial, energy, or environmental regulation, would therefore still require a bipartisan agreement as they do today.

2. The policy specifics of routine legislation could shift incrementally. Although major reforms in most policy areas are no more likely to pass under a Republican-majority Senate than a Democratic one, control of the Senate majority could have an effect on more routine deadline-driven legislation. Examples in this area might include the extension of expired and soon to expire tax provisions (so-called "tax extenders") that Congress is likely to pass by early 2015 if not late this year, or the renewal of the highway program that needs to occur by May 2015. Republican majorities in both chambers might reduce the likelihood that revenue is raised from corporate tax changes to pay for these bills, for example.

3. Fiscal policy changes could reach the President's desk. Although most legislation would need to surpass the usual 60-vote threshold in the Senate, if Republicans won House and Senate majorities, they could use the budget “reconciliation” process to pass fiscal legislation through both chambers of Congress with only a simple majority vote. This procedural mechanism, which is tied to the annual budget process, has been used to enact significant fiscal policy changes in the past, including several rounds of deficit reduction legislation in the 1980s and 1990s, tax cuts in 2001 and 2003, and parts of the Affordable Care Act (ACA) in 2010. Changes to the ACA might be a focus for reconciliation legislation, and tax reform could theoretically be addressed using this process as well. That said, President Obama would still have the option to simply veto whatever legislation arrives at his desk and would presumably do so if the reconciliation process was used mainly as a way to circumvent Democratic opponents in the Senate. So while a potential Republican Senate majority might result in greater legislative debate on fiscal policy, it is much less likely to result in enactment of significant fiscal policy changes.

4. Uncertainty regarding fiscal deadlines could return. Markets have gradually become accustomed to the way Congress has dealt with events such as the debt limit, the "fiscal cliff," or the expiration of government spending authority: the House would often pass a bill seen as unlikely to become law, the Senate would then pass a compromise bill, which the House would accept, often at the last minute and relying on significant Democratic support. This pattern could change if Republicans took the majority in the Senate. For example, when the next debt limit increase becomes necessary in Q3 or Q4 of 2015, Republicans might try to use the reconciliation process noted above to couple it with other political priorities and pass it only with Republican votes in the House and Senate, potentially attracting a presidential veto. Spending legislation that will need to be renewed to avoid a government shutdown could become another source of uncertainty. In an interview this week, Senate Republican Leader McConnell said that under a Republican majority, "we're going to pass spending bills, and they're going to have a lot of restrictions on the activities of the bureaucracy. That's something [President Obama] won't like, but that will be done. I guarantee it." While the eventual outcome of these debates would presumably be the same as under the current composition of Congress--the debt limit is eventually raised, spending authority is eventually extended--it might take market participants time to get used to a new process.

5. Congressional Republicans and the White House might be able to find common ground on a narrow set of issues. There may be a few issues where congressional Republicans are closer than congressional Democrats to the Obama Administration's position. One of these could be international trade, where Congressional Republicans have tended to be more supportive of bilateral and regional trade agreements, such as the Trans-Pacific Partnership (TPP), which could be finalized late this year or next, or Trade Promotion Authority (TPA), which allows the administration to negotiate trade agreements subject to an up or down vote in Congress but no amendments and is seen as an important tool to pass TPP in Congress.

Hey, say what you want about the Republicans. I hate them too - I'm a staunch conservative - the GOP hates me. But we have to somehow put a stop to this lawless (unimpeachable) bastard dictator in the WH. I'll settle for neutering him if that's the only thing that will work.

Those of you appreciating gridlock may as well appreciate the status quo. There are no solutions in this system... Let alone this two party system. I don't care how hell bent the Tyler-Algos lean right. And calling it a lean is generous.

Yep, every election season I feel a twinge of "what if?". What if the D's or R's win a majority? Will it hasten the collapse? Will a split government hasten the collapse? Every day that goes by without a collapse only makes the eventual collapse worse. But in the end we just ride it out with one set of assholes or another. Getting worse day by day.

Let it burn. Vote Democrat. They have repeatedly demonstrated they have ZERO understanding of how value is produced, what money means, what individual rights are and think they can print their way to prosperity if they just believe in the world they want with no recognition of the constraints imposed upon them by reality ( well that is your reality.. in my reality one can mint 1 Trillion dollar coins and all will be well)

Vote Democrat and lets get this thing over with and let the left own it for once. There is nothing we can do to stop it now anyway.

Let the Dems get their civil war started , watch the poverty spread and let the non-contributing zeros die at the hands of their own ideology. If the GOP wins they will try to hold the Status Quo, and that will just give the police state more time to become entrenched and powerful. Vote Democrat. Let it burn.

Uh huh... more of the same. But we do need a War on Unhealthy School Meals, so plenty to get done.

The Establishment Republicans are traitors to the conservative cause. Interesting listening to right wing radio (I tune stuff like that in on both sides the aisle so as to just hear the memes of the day) these days. They're by and large vilifying the RINO Establishment ....Interesting dynamics.One chap (correctly) said that the Republican Party is at war with its own base. Great line

Same shit the Blue Team did when W was in office, blaming Blue Team members for being too compliant to the wishes of the Red Team. When the Blue Team is in power, the Red Team radio personalities say that the Red Team players in office are too compliant to Blue Team policy. And most people believe there is a difference despite this readily observable fact.

I have to get covert when I tune in a right wing talker these days. People look askance at that these days which I'm okay with too. Like you said, it's interesting to see what the talking points are and what has them upset.

Mark Levin has been shrieking that we need to spend more money to try resurrecting Ronald Reagan because he's what Real Conservative Republicans need to save the GOP even if they don't know it yet. Limbaugh seems adrift these days and talks about football teams a lot. Sean Hannity is thoroughly disgraced and on his way out. Seems like someone has pushed Mike Wiener AKA Michael Savage to an unlikely pinnacle with a drive time spot on WABC with syndication. He's even harder to listen to than Mark Levin (even though he doesn't shriek) but he talks about pasta sauce, his boat, and of course his lovable dog Teddy. Then maybe some politics with beatnik muzak playing in the background (he's so eclectic!).

Not even Talk Radio is immune to the Entropy we're witnessing today. Everything is mediocre if it doesn't suck already. The angle of repose is getting steeper and we'll all slide down the pile into the shredder eventually. That's the thing about Entropy. Like Lord Kelvin said, the heat death of the universe is a real bitch bitchez.

Whether the Senate is Democrat or Republican should not affect the markets in the slightest. Senate control may have a huge impact for some people, but the impact on the "markets" will be nill. Nothing related to "markets" will change by enough for most speculators to notice. The impact of a Republican Senate is as follows:

1. Supreme court nominations are the most affected. There is no way in hell that Obama will be able to appoint a Progressive if the GOP controls the Senate.

2. There may be a small effect on fiscal policy. It won't be enough to notice in aggregate toals, but could affect particlular sectors. Any really big bets that depend on government green energy programs could come up snake eyes if there is a fully Republican Congress.

3. A fully Republican Congress would have the effect of making Obama more intransigent and government shutdowns almost certain. But these shutdowns won't last more than a month.

Beyond the above, no effect. Other factors matter much more than this election.

There would be at least 4 more wars, more Abrahms Tanks for police departments, IRS wearing Glocks, FBI increased to presence in all countries instead of just 120. Obama care will be slightly and proudly claimed as " fixed ".

I love all these purple ties on the MSM talking heads. Subliminal wouldn't you say??? Maybe we could start with the seat Al Franken and his hebrew buddies stole. Or how about Herb Kohls seat. You can't tell me that Wisconsin elected Johnson from the tea party and then turned around and elected that carpet munching drunk Baldpussy, um, I mean Baldwin. When is AMerican going to wake up and realize their vote doesn't count. The supreme court betrayed us and gave all the power to corporations. Billionaire presidencial elections. Its a complete and utter joke. I saw first hand how the repubs rigged the primarys and kept Paul out of the running. Bicameral I think they call it right? More like a globalist fascist uni-brow system

Senate Republicans are so used to bending over for anything the Democrats want - why would that change if McConnell became the Majority leader? Other than needing to send more pork back to his home state...